NASD Examining 529 Tax Disclosures

March 19, 2004 (PLANSPONSOR.com) - The National
Association of Securities Dealers (NASD) is investigating six
large securities firms to see whether they sold 529 plan
accounts to college savers without properly informing the
investors of their potential tax burdens.

The NASD probe focuses on whether the firms made the 529
sales of plans sponsored by states other than their
investor’s own without informing customers that they could
lose state tax deductibility typically only available when
saving in one’s home state 529 plan, the Wall Street
Journal reported.

The “overwhelming majority” – typically more than 90% –
of the 529 dollars taken in by the six firms came from
nonresidents of the states sponsoring the particular plans
involved, NASD Vice Chairman Mary Schapiro said. She
refused to identify the six firms, the Journal said.

While there can be valid reasons for investors to opt
for an out-of-state plan, “we have to look at it very
closely,” she said, because “they potentially lost one of
the great benefits of buying a 529 plan: state tax
deductibility” of plan contributions. Also, Schapiro
said the NASD is “looking at expanding the scope of what we
are doing beyond these six firms.”

The NASD apparently isn’t the only one in Washington
looking at the popular college savings accounts. In a
letter made public this week, US Securities and Exchange
Commission (SEC) Chairman William Donaldson said aspects of
these state plans, which typically use mutual funds as
their primary investment option, are “complicated and
likely difficult for parents to understand.” He said he has
established an SEC task force to look at issues, including
529-plan disclosure and the high fees of some of the plans
(See
SEC
Looks at 529 Fees
).

Congress is also getting involved. US House of
Representatives Financial Services Committee Chairman
Michael Oxley (R-Ohio), who had requested Donaldson’s
comments on 529 fees and disclosure, views the SEC task
force as “a good step” and intends to hold 529 hearings,
his spokeswoman, Peggy Peterson told the Journal.

Lured by their significant federal and state tax
advantages, parents and grandparents have stashed large
sums in 529 accounts. Across the country, the
college-savings plans had more than $37 billion in assets
as of last month, according to Morningstar . Income from
these plans may be tax-free if used for qualified education
expenses.

Well aware of drawbacks of the popular plans, some 529
fans say they welcome the new attention from Washington.
“It’s about time,” says Joseph Hurley, founder and chief
executive of Savingforcollege.com in Pittsford, New York,
noting that the complexity of 529 plans and their
wide-ranging fees “were recognized as issues way back when
529 plans started” in 1997.